Overnight China reports disappointing fixed asset investment (FAI) figures. Nominal FAI declined to 7.5% YoY in May from 10.1% YoY in April. The leading indicator, FAI project new starts growth, also decelerated to 19.1% YoY in May from 35.5% YoY in April. I would interpret the slowing is mainly due to the CCP realized the unfavorable consequence of credit pumping since Jan and started to control the hype especially after the “anonymous authorities” speech in March.
Let’s take a detail look by sectors.
Property investment growth decelerated to 6.6% YoY in May from 10.3% YoY in April. More importantly, the property new starts growth started to turn around, from 25.9% YoY in April to 10.6% YoY in May. That’s important as the property developers start to take a realistic check of the market after the Q1 home sales rally.
Infrastructure investment is the bright spot and remains at a relatively fast pace around 20% YoY growth. Infrastructure is the only part where the Chinese government can have direct impact, and has been used as the buffer to prevent FAI freefall in the last couple years. With accommodative fiscal policy and local government bond swaps, I expect it will continue at the 20% growth level.
Manufacturing investment is the part which we should worry about. Its growth drops from 5.3% YoY in April to 1.3% YoY in May, a historical low number. The decline is consistent with the fast slowing pace of private investment growth. The red flag, private investment growth, accelerated its decline rate since the beginning of 2016, even when the government pump record high credit into the system. This tells me that the credit does not flow into the private sectors but all into the government controlled entities such as SOEs and LGFVs. It will create crowd out effect and hurt the private sectors, which should be the most important growth driver, in the long run.